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I’m starting a series of personal finance posts to keep track of my own personal finance thoughts and planning. Having graduated from a diploma in banking & financial services, I’m glad to have been exposed to a broad overview of financial instruments in Singapore since my teenage years. Hoping to share some of my experience or knowledge 🙂
What Is “Buy Term, Invest The Rest”?
This refers to buying term life insurance and investing the rest of your money, to generate the returns that are comparable to what whole life insurance can bring.
Whole life insurance usually covers us for the entire of life until we pass on. This would include us paying premiums on a monthly or yearly basis, and there will be a guaranteed and non-guaranteed portions for returns as years go by.
Yes, are you aware that there is a portion on the return column that is not guaranteed? Essentially it will depend on the (1) economy condition (2) insurance company’s profitability.
There is a cash value earned over the years (participating fund) as well as potential bonuses (not guaranteed). This would mean that the amount would be compounded and increase over the years.
I used to work in Great Eastern, and from what I know, there was only 1 year of reduced return (up to the point of lesser capital back) through GE’s 100+ years of history. So chances of getting lesser return or eroding your capital should be quite low, though not 100% impossible.
For term (life) insurance, it is a very simple and basic form of insurance where the cost is lowest. It will be paying for a fixed period of time (eg 5 years, 10 years) or until a certain age (eg. 65, 70, 100) with no return back. For such reason, premiums for term insurance is much, much lower than whole life insurance. Premiums for term will increase with age as we renew the term insurance, unless you buy a level premium (applicable for term insurance insuring up to a certain age).
Both term life insurance and whole life insurance should allow Critical Illness (CI) rider.
P.S.: Actually all of us has a term insurance! Do you know that? 🙂 It’s the Dependents’ Protection Scheme under CPF.
What are Whole Life Policies?
Whole life policies are insurance plans that cover solely for whole-life protection, where death benefit will be paid to beneficiaries when we pass on.
These policies would also allow CI riders for extra protection against many critical illnesses as defined by the insurance company. Thus, payout will also be made with diagnosis of CI that matches the definition under the policy.
These policies are not marketed as savings or endowment plans or investment-linked policies. Please do not get endowment plans for the purpose of whole life insurance. ILP is also not preferred as investment costs for ILP would be quite high.
Whole life policies are also good if you are not disciplined enough, as the policy makes you to set aside a certain amount of money on a monthly or yearly basis.
How Do We Know The Amount to Invest If We Buy Term?
You can go to your preferred insurance company’s website to check if they have a calculator to calculate your premiums for a certain amount of sum. insured
Compare the premiums needed to get the whole life insurance vs the term life insurance with the same amount of sum insured. You can invest the difference, where you will have to try to get your investment returns to be between 5-8% or more.
It is also important to re-invest your returns to get the compounding effect through the years.
Should I Get Term Instead of Whole Life Insurance?
I find that term insurance will suit those people who are actively managing their investment portfolio with steady good returns and who have a good knowledge of various investment instruments.
If you are super risk averse, or like to only invest in bonds, or do not do any kind of investment at all, then it might be better for you to get whole life insurance.
Also, do consider your age too. If you are very young, such as 20 years old, consider the limited payment whole life insurance. These policies are whole life insurance with limited payment over, such as, 10 years, 20 years, 25 years. After the limited payment period, you remain insured for the whole of your life.
Limited pay policies are good for babies or young children too. They can get the policy at a healthier stage, with lower premiums, and when they graduate from school, they have at least 1 life insurance that they do not need to service. They can then add on term or whole life insurance as they wish.
Why Do Most Insurance Agents Sell Whole Life Insurance?
There is no right or wrong in selling the type of products. I find most insurance agents to be trained to sell higher commission products (sorry).
These products are usually the savings/endowment plans and whole life policies.
How Much Coverage Do I Need?
Some folks might encourage a coverage of 10 to 15 times of your annual income.
For example, if you earn $80,000 a year, you can consider a coverage of $800,000. It can be quite challenging for most people to do – including myself :p
Do also consider your financial obligations, income and the life cycle you are in.
As I’m a parent to young kids and with ageing parents, I value the importance of insurance, however I also see the importance of having sufficient cashflow.
Getting insured (whole life policy) is a way of not adding burden to your loved ones. I also like to suggest adding a CI rider to whole life policy, in case anything happens *touch wood*, we are being responsible to our loved ones, by not adding on to their burden.
Please also do not surrender your current whole life insurance just to get a new term insurance. Always consider your financial plans, how savvy you are in investment, what is the steady amount of return you get from your investments on a yearly basis, and whether you are disciplined enough to invest on a yearly or monthly basis.
If you may have any concern or doubts, it is always best to speak to your financial planner.
Any thoughts that you might have? Leave them in the comment section below!